Wednesday, December 2, 1998

Oil patch suffering, consumers gleeful over rock-bottom oil prices

By MAGGIE JACKSON

Associated Press

NEW YORK - Oil prices are scraping the bottom of the barrel, leaving U.S. consumers chortling but drillers and refiners glum.

"Those of us in the oil patch have seen much better days," lamented Tim Colwell, spokesman for Tulsa, Okla.-based Parker Drilling, a small contract driller that’s suffering amid oil’s drop to about $11 a barrel -- its lowest level in the United States in 12 years.

With the United States the world’s second-largest oil producer after Saudi Arabia, companies along the petroleum industry food chain are laying off workers and slashing capital expenditures.

The slump helped lead to the marriage of oil behemoths Exxon and Mobil, who said Tuesday they expect $2.8 billion in cost savings by merging.

Yet the steep drop in oil prices is also an early holiday gift for consumers. The retail price of regular unleaded gasoline fell to 97.4 cents a gallon this week, its lowest level in eight years. Last year, prices averaged $1.15 a gallon. Home heating bills, helped by mild temperatures, are also low.

Low oil prices are also keeping U.S. manufacturing costs down, contributing to cheaper electricity and otherwise dampening any trend toward inflation.

"It does help at the end of the month," Jeff Nelson of Dallas said of the gasoline prices. Nelson, a salesman, travels frequently in his gas-guzzling sport utility vehicle.

Oil prices aren’t expected to shoot up any time soon, even if the unseasonably warm fall turns wintry, analysts said. There are simply too many difficulties weighing on the market.

Chiefly, Asia’s rippling economic problems have cut demand for oil, and the divisive Organization of the Petroleum Exporting Countries has been unable to curb the glut. OPEC, which controls 40 percent of the world’s daily production, increased output last winter, then made a 2.6 million barrel-a-day production cut in June that did little to boost prices. A meeting last week failed to reach agreement on further action.

Tuesday’s big merger, while creating the world’s biggest company, will have little effect on world oil prices, observers added. "It’s Kuwait and Saudi Arabia that are the key players in the economic game, not Exxon and Mobil," said David Wyss, chief economist at Standard & Poor’s DRI consulting group.

In future, the new Exxon Mobil Corp. -- along with other consolidated oil companies -- may be able to mark up consumer prices in some local areas where they will exert strong control, said Wyss.

For now, however, U.S. oil producers both big and small are trying to limit the fallout from the collapsing oil and gas markets. The United States produced 2.3 billion barrels of oil last year, half the oil it used, according to the American Petroleum Institute.

Parker Drilling has laid off 90 employees out of a global work force of 4,500, said spokesman Colwell. Drilling rigs are being idled in Asia and the Far East, he said.

Burlington Resources, a Houston-based oil and natural gas producer, meanwhile is canceling the rental of many drilling rigs for a major project off the Gulf of Mexico. Overall, the company will cut capital expenditures 75 percent, or up to $150 million, on that project alone.

"If oil prices stay down next year, not only our company but other companies will slow down projects, if not cut them out completely," said spokesman John Carrara.

Still, historically oil-dependent states such as Alaska and Texas aren’t likely to be hit as hard as they were by the glut of 1986.

Retailers and service industries are booming in Alaska; The Gap opened a first store in the state this fall. In Texas, mining jobs -- mostly comprised of oil and gas drilling -- dropped from 5 percent of the state’s jobs in 1982 to 1.9 today, according to DRI of Lexington, Mass. "The economy is expanding. Things here are very positive," said Rick Douglas, president of the Dallas Chamber of Commerce.

But he added, "Oil is still a very important industry here. There are an awful lot of companies that do business with the major oil producers."

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